Informatics Publishing Limited

Hafezali Iqbal Hussain ¹, Mohd Farid Shamsudin ¹, Noor H. Jabarullah ²

Affiliations
1 Universiti Kuala Lumpur Business School, MY
2 ICOLE –Univerisiti Kuala Lumpur – British Malaysia Institute, MY

Abstract

Objectives: This paper estimates firms’ speed of adjustment by measuring the difference between simulated debt levels (target) and actual leverage (observed) levels to the difference between real leverage levels and lag levels based on the unit of observation (firm level) data. We test the impact of endogenous and exogenous factors to speed of adjustment. We find that the interaction of types of factors is statistically significant which would invite a rethink on the current understanding of capital structure decisions.

Keywords

Capital Structure, Speed of Adjustment, System GMM, UK Firms

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Hafezali Iqbal Hussain ¹, Mohd Farid Shamsudin ¹, Noor H Jabarullah ², Milad Abde lnabi Salem ³, Fekri Ali Shawtari ¹

Affiliations
1 Universiti Kuala Lumpur Business School, MY
2 ICOLE –Univerisiti Kuala Lumpur – British Malaysia Institute, MY
3 Ahmed Bin Mohammed Military College,, QA

Abstract

Our paper estimates the speed of moment adjustment based on the first difference of the lead (t+1) leverage levels (actual lead) and lag (t-1) leverage levels (actual lag) to the first difference of simulated lead (target) leverage levels and lag levels (actual lag leverage) for firm level data. We introduce an intrinsic limitation (financial constraints) to the model to test the impact on speed of adjustment and distance reduction. We find that financial constraints have a statistically and economically significant impact on rate of adjustment and distance reduction to target leverage levels.

Keywords

Capital Structure, Financial Constraints, Financial Econometrics, Speed of Adjustment, UK Firms.

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